Thread: An explanation for the failure of capitalism

Central among the assumptions that underlies free market theory is the belief that every trade results in a benefit to both sides of the trade, beyond the mere market value of what is traded. When you consider it, this assumption makes good sense, and seems true. After all, why would you trade something you have for something you didn't have if what you wanted wasn't worth more to you than what you'd give up for it? And why would the person you'd trade with trade with you if the same thing wasn't true for him? So in every trade, it seems reasonable to suppose that both sides of the trade benefit.

Let's illustrate this assumption by playing a game. Instead of trading goods or money, we'll trade pebbles. We each start with 100 pebbles. Besides the pebbles we have, there's also a very large pot of pebbles (an essentially infinite number). Pebbles will represent the benefit we get from a trade. At the end of the game, we can exchange pebbles for pieces of candy, but there are only ten pieces of candy. How many pebbles a piece of candy is worth will depend on the total number of pebbles in the game. We figure it out by taking the total number of pebbles we all own (not counting the the large pot of pebbles), and dividing that number by ten.

To represent the benefit we get from engaging in a trade, every time we trade pebble for pebble, we draw extra pebbles from the community pot. So you and I trade one pebble to each other, and we each draw an extra pebble from the pot. That extra pebble represents the additional benefit we get from engaging in the trade. Now, you might think this is an exceptionally pointless game, for, as long as we each benefit from a trade equally, then pieces of candy we get at the end will still be divided as evenly as if we never made any trades at all.

But what happens if one person consistently gets a greater benefit from trading than another? For example, when we make a trade, you get one extra pebble from the pot, while I get two. If we play the game long enough, eventually, I'll get all the pieces of candy at the end.

Now, presuming that we cannot change the number of pebbles we get, and you desperately want some of that candy, you only have a few choices. Either refuse to participate in any trades, and force the end of the game before I accrue enough pebbles to shut you out, increase the number of pieces of candy, or get the power to add a new rule that says every 100 trades, we take 3 pebbles from everybody for every 10 pebbles they have, and redistribute those pebbles equally between all the players. It's important to keep in mind that none of these fixes will ever bring us back to equality, where you get the same number of pieces of candy as I get, but at least they will insure that you get some pieces of candy, that you won't get shut out.

How might a free trade situation resemble our game above? Well, it turns out that producers of goods and services for trade will always benefit more in a given trade than consumers of those goods and services. The reason to see why is easy. Let's say you produce shoes for trade. Part of that production involves you making (or paying others to make) a whole bunch of shoes, so many that you could never use them all yourself. So any given pair of shoes you possess isn't going to be worth that much to you, in fact, only as much as it cost you to produce them. But if you're a consumer of shoes, then the shoes I have are worth quite a bit more to you, as you don't have any and need some. If you make your money through wages, then the money you exchange for those shoes represents a certain amount of time you'll be trading for those shoes. But the time you'll be giving up to pay for those shoes is going to be worth quite a bit to you as well, as you could have spent that time doing something you'd rather be doing, like playing with your kids or fishing or dabbling in the garden, or whatever makes you happy. Furthermore, the money you trade can be spent on other things that will be worth quite a bit to you as well. Now, the value of the time you'll be giving up to pay for the shoes will of course be worth less to you than the shoes you'll be getting, and the value of the other things you could buy will be worth less to you than the shoes, otherwise you'd be buying that other thing, but in the end, it's not that much less. So producers will generally get a greater benefit from engaging in trade than consumers.

Now money is the representation of value, or the benefit that's gained through trade. It is the job of the Federal Reserve to print money to keep up with all this new value that's created through trading. So the Fed is like the big pot of pebbles in our game that we each dip into when we make a trade. The pieces of candy at the end are like the goods and services that are consumed. The three fixes to the game I mentioned that you could resort to represent violent revolution in the first case, the increase of productivity in the second case, and taxation and redistribution in the third case.

Of course, our game is only a crude approximation to what happens in our economy. After all, we don't trade money for money, or pebbles for pebbles. We might amend this game to make it more faithful to reality by adding an equally large pot of candy, allow people to trade candy for pebbles, and allow people to eat the candy they have at any time. We must also stipulate that every player must eat at least one piece of candy every 10 turns. If they run out of candy, don't have enough pebbles to buy any more, and must eat a piece of candy, they're out, they lose. The producer can get a piece of candy out of the pot and add it to his pile every 3 turns, but to do so, he must give any consumer of his choice one pebble. At any turn, a player can trade pebbles for candy ( or candy for pebbles, or candy for candy, or pebbles for pebbles), and get their allotted benefit from the pebble jar. How much candy costs is still determined in the standard way, by taking the total number of pebbles owned by everybody in the game, and dividing that by the total number of pieces of candy owned by everybody. You don't get to determine how much you can sell your own candy for, because in this game, the candy, pebbles, players and trades stand in for billions of discrete goods and services, trillions of dollars, hundreds of millions of people, and tens of trillions of trades respectively. At this level, the costs of the aggregate amount of these goods and services is determined by the money supply, the free will of the individual can be factored out statistically, and the continuity of individual trading can be quantized into the turns of our game. Furthermore, no player can refuse to trade anything for anything else but they always have the choice of trading pebbles for candy first. Trading pebbles for pebbles or candy for candy will always be an equal 1-to-1 trade (and don't forget to take your allotted pebbles out of the pot for trading).

Even under this amended game, eventually, it will end, as eventually the consumers will have so few pebbles relative to the producers that they won't be able to buy any more candy. And this is a problem, because if this game is a fair representation of the free market situation on the large scale, this means that capitalism is unsustainable in the long run, unless the producers can find a way to add more candy to the game, or we redistribute the pebbles (or candy) from time to time. This is why high inflation and large levels of wealth and income inequality mark the end-stages of capitalism. The only way out of this is productivity innovation, (and competitive private industry is very good at this, but eventually meets up with physical and environmental limits and can't be relied upon to always overcome this problem) or wealth redistribution. The economy is not a game we want to end. Inflation in itself is not bad, so long as wealth remains fairly equally distributed. Inequality by itself is not bad, so long as the money supply is very very tight, and everybody has at least some money. But inflation combined with inequality result in Great Depressions.